Levelling the EU playing field post-enlargement

Two MEPs discuss the challenges ahead for raising overall EU competitiveness in the east and west

European Voice

11/24/04, 5:00 PM CET

Updated 4/23/14, 10:00 PM CET

Low taxes and wages will not remain a competitive advantage for much longer, argues Toomas Hendrik Ilves

THE business climate in new member states has changed dramatically since the wild East days of 10-15 years ago, when EU membership was a distant, hazy and, in some cases, a seemingly impossible goal. Much of the change is due to new members taking over the acquis communautaire, as well as the growing maturity of markets and business communities.

In the past, lack of health and safety regulations and patchy legal protection allowed the adventurous to make huge profits. But nowadays investors have the same protection and obligations as older member states.

In other words, with stability and security comes a loss of opportunities for making quick killings and windfall profits.

Nonetheless, new members remain distinct in a number of ways. Much has been made of low corporate taxes and income tax and, barring unlikely EU tax harmonization, this will remain an advantage while new electorates continue to tolerate the poor social provision and infrastructure that come with low tax rates. When enough voters envy conditions in older member states, citizens will elect governments who will modify tax policies.

Either that, or governments will be forced to raise taxes as skilled employees find better jobs elsewhere in old member states, an acute problem in the health sectors of a few member states.

Investors should also be ready for low tax rates and minimal government services. This may seem to be an advantage, but businesses also need government services.

New member states are hardly new to the European business community. Poland, Hungary, the Czech Republic and Estonia experienced huge levels of direct foreign investment in the years leading up to enlargement, so many niches have been filled. Emerging service sectors are often better and more responsive than in old member states.

Low wages remain a competitive advantage. But, let’s face it, if investment depends on low wages, south-east Asia will beat anything offered in Europe, old or new. If, on the other hand, one seeks skilled labour and EU production, then eastern Europe is much more attractive. This comparative advantage will remain for at least a decade or two, by which time wage rates throughout the EU should be harmonized.

Other important differences exist. On the negative side, corruption remains a problem for some, but not all, new members. On the positive side, people are often amazed to see how much more developed computer and information technology and IT infrastructure there is in new member states.

In my own country, Estonia, 95% of bank transactions are internet- based. Mobile phone services are often better, government services more computerized.

The biggest negative in new member states is the quality of basic infrastructure. East and West started off from almost the same level in IT infrastructure (with a number of new members going on to surpass the old). But the 50-year head-start in roads, bridges etc enjoyed by western Europe shows and will continue to do so. It is here that the EU faces a huge challenge for the next decade.

Many politicians in the new member states maintain that ‘old Europe’ should learn from new members. Low wages, lower taxes, less regulation and lower quality social services are said to provide for more dynamic (some would say more American) economic models. But productivity remains low in comparison to old members and it is unlikely that old member electorates will accept a decrease in quality of social services. Nonetheless, while old members may not ‘learn’ much from the new members, tax competition may force some old members to adopt less confiscatory tax policies.

It isn’t clear, though, which will come first: old members lowering tax rates to keep companies in their countries, or new members raising tax rates to keep their qualified workers.

We must support the spirit of creative enterprise to gain the competitive edge, writes Zuzana Roithova

THE European Union has committed itself in its Lisbon Strategy to becoming the most competitive economy in the world by 2010, aspiring to leap ahead of the United States and Japan.

For the moment, no distinct progress has been made.

According to experts, each member state has to cut down its generous social systems and at the same time improve investment in science and research.

This year’s EU enlargement could provide new impetus for achieving these goals. The number of citizens in the EU has increased by 20% with gross domestic product (GDP) increasing by just 5%. On the other hand, economic growth and labour productivity in the new member countries is more dynamic than in the old ones.

But that is not enough. Being a member of the European Parliament, I want, among other things, to advance greater support for education, science and research.

In the Czech Republic our main concern should be better cooperation between businessmen and scientists with the understanding and support of regional and local politicians.

The priority of the government in the Czech Republic must be to foster economic development based on knowledge and not on cheap labour. To support the spirit of creative enterprise is my goal.

Among my priorities is also the support of regional development programmes that stem from solidarity between the economically strong European regions and the more needy ones. These will play an important role in the implementation of the Lisbon Strategy.

These days, with investment in research and education lagging behind the US and Japan, and few scientific breakthroughs being produced or even applied, it is more desirable than ever that the EU supports this important target.

What can the Czech Republic offer to the EU in this respect?

The Czech state is aiming more and more at software investment. That means we are trying to attract companies who do not just need cheap labour (which will later move to economically less developed and therefore cheaper countries), but also need a stable atmosphere, quality infrastructure, qualified and educated employees and, last but not least, a higher quality of living.

Prague, the capital of the Czech Republic, has already attracted some companies.

The transfer of the DHL computer centre is one of the biggest investments of its kind. And why did the PSA group, IBM, Sun Microsystem and Dell do the same?

The level of Czech education, including knowledge of languages, is very high. Of the 3,000 jobs created by foreign investment, one-third has been filled by university graduates and one-third by workers who have enjoyed higher education.

In addition, Prague is not only a very attractive and historic city, but it is also a thoroughly modern city. Its GDP per citizen is above the EU average.

And now it is located in the centre of an enlarged Europe.

On a worldwide scale, the Czech Republic is the fourth-most attractive country for offshore centres (behind India, China and Malaysia). And – as is the case also in Hungary – it is still increasing its abilities from industrial to hi-tech level.

That is very inviting for multinationals as well as for minor enterprises – there are 15 computer companies from Israel which set up offshoots in the Czech Republic.

The Czech state is seeking to create a welcoming environment for sophisticated investors and to acquaint them with other less well-known cities which are comparable to Prague.

There are universities and a good level of infrastructure in Brno, Pilsen, Ostrava and other cities – that is what is making them more attractive to new investors.

Czech MEP Zuzana Roithova is a member of the European People’s Party (EPP-ED) and vice-chair of the committee on the internal market and consumer protection.